Consider a pure exchange economy with two individuals (A and B) and two goods (x and y).

The utility functions are given by UA(xA, yA) = min[xA, yA] UB(xB, yB) = min[xB, yB],

where xi and yi are the quantities of the two goods consumed by individual i = A, B. The total endowments are wx = 10 and wy = 5.

(a) Represent the indifference curves of both individuals in the Edgeworth box and find the Pareto set.

(b) Let the individual endowments be wA = (7, 2) and wB = (3, 3). Determine the equilibrium quantities and prices?

(c) What can we say about the equilibrium prices for other values of individual endowments?

Answer rating: 100% (QA)

a To represent the indifference curves of individuals A and B in the Edgeworth box we need to plot their utility functions The utility functions are given by UAxA yA minxA yA and UBxB yB minxB yB For ... View the full answer